I am responding to your letter to Ralph
Nader dated April 7, 1997 that was circulated at the UCC 2B meeting
in Santa Monica, CA April 11-13, 1997. Your letter mischaracterizes
several matters which I want to clarify.

In your letter you state that
SPA "has never issued any statement giving blanket support
to any of the successive drafts of the Article 2B." First,
Mr. Nader did not claim that SPA was giving "blanket"
support to 2B, and indeed it is a meaningless objection because
it is difficult to imagine anyone providing "blanket"
support for a complex draft that now spans nearly 200 pages. Second,
in meetings that I have attended, lawyers who claim to represent
SPA have repeatedly made statements supportive of the direction
and content of Article 2B. They have consistently voiced strong
support for those parts of the draft that favor vendors over customers.

Confirming my sense of SPA's
position is a report on your website of the last annual NCCUSL
meeting. SPA notes that Article 2B was criticized as "overly
biased in favor of licensors" and that the drafting committee
was admonished to "go back to the drawing board and develop
a more balanced draft." The report said that SPA will undertake
an effort to "educate" NCCUSL because "SPA believes
the draft is already balanced ."[1] I take this to mean
SPA supported the draft - especially in areas of contention between
licensors and customers which are the exact issues highlighted
in Mr. Nader's letter. Whether this amounts to "blanket"
approval - a term not used by Mr. Nader - is an attempt to obscure
the issue.

In your letter to Mr. Nader,
you also suggest that shrinkwrap license terms are currently enforceable
but limited by the concept of unconscionability. As you stated:

[I]t is our view that these
terms will be enforceable under contract law unless they are objectionable
as unconscionable in the industry.

Unconscionability is a wholly
inadequate source of protection for consumers. Research results
that were reported in a recent Article 2 drafting committee meeting,
and also brought to the attention of the Article 2B meeting participants
in Santa Monica, demonstrated that in the last 10 years, only
14 contracts have been invalidated by the courts as unconscionable.[2]

As for the validity of shrinkwrap
licenses, you say that SPA believes they are enforceable under
current law. Shrinkwrap licenses have been held enforceable in
one court. The Seventh Circuit's ProCD [3] decision is a slender
reed upon which to build an assertion that such licenses are fully
enforceable nationwide - especially since shrinkwrap license terms
have been invalidated in several cases involving business purchasers.
Courts have found that the license terms are preempted by federal
law or the license terms are an invalid attempt to materially
modify the transaction after the contract has been formed.[4] Businesses
are traditionally accorded less protection than consumers.
Courts that have viewed shrinkwrap with suspicion in the business
context would be even more inclined to invalidate them
in a consumer transaction. Software licenses are also analogous
to post-sale warranty disclaimers, which are often invalidated
in the consumer context.

Legality aside, unilateral licenses are
unfair. Indeed, you have objected to exactly this type of one-sided
license when it was imposed upon a segment of SPA's membership.
In your testimony before the Federal Trade Commission on "Innovation-Based
Competition," you objected to licenses that are dictated
by a licensor who is able to demand extremely favorable terms.
When your members were faced with one-sided licenses, you went
to the government seeking regulatory relief. So
much for, as you claim in your letter, supporting the "bedrock
principle of freedom on contract." As
you stated:

In these situations, the licensor
effectively dictates the terms of the required license -- essentially on a
take-it-or-leave-it basis.[5]

That is similar to the situation
in which Article 2B will put consumers. Regardless of the specific
circumstances - whether it involves a consumer, small business,
or SPA member - "take-it-or-leave-it" licenses that
are dictated by the licensor are onerous. The shrinkwrap license
validated under 2B is particularly unfair because in addition
to permitting burdensome terms, these terms are hidden until after
the customer has paid. Customers, not just SPA members, should
have the benefit of protection from unfair terms.

In your letter, you claim
that UCC 2B does not allow a company to dictate "the state
to which a consumer may travel to pursue legal action." You
misstate both Mr. Nader's letter and Article 2B. Mr. Nader's letter
refers to "customer," not the far more limited class
of "consumers" that you mention. As you know, 2B defines
"consumer" narrowly, so the few protections supplied
to consumers are not available to most purchasers. Article 2B
makes a forum selection clause binding on a consumer unless the
consumer can prove both of the following: 1. That the court has
no jurisdiction over the consumer - that is, the consumer must
prove under the Due Process Clause of the U.S. Constitution, that
the court is unable to compel the consumer to appear in that state;
and, 2. That appearing in this court would "unfairly disadvantage"
the consumer.[6] This falls short of eliminating all forum selection
clauses for consumers.

More importantly, the software customers
that will be bound by forum selection clauses (including
sole proprietors, home-based offices, and small non-profits and
businesses), represent the vast majority of the mass market. According
to the SPA Software Sales Report for the second quarter of 1996,
software categories most likely to be purchased by consumers -
Entertainment, Home Creativity, Home Education, and Word Processor
- represents only 27% of the market. Software purchased by "non-consumers"
make up 73% of the market,[7] and this rough estimate is likely to
be well below the actual number because all word processor programs
and other products would have a significant percentage of purchasers
that do not fit within 2B's consumer definition. Article 2B's
forum selection clause expressly gives software companies the
ability dictate where non-consumers must travel to in order to
pursue a legal remedy. This section will therefore restrict, if
not eliminate, the ability of most software purchasers to obtain
a legal remedy due to the dramatically increased cost of bringing
suit hundreds or thousands of miles from home.

Your assertion that "contrary
to the statement contained in [Mr. Nader's] letter, the current
draft [of UCC 2B] contains no provision dealing with the enforceability
of mandatory arbitration terms," is technically accurate,
but highly misleading. Mr. Nader's letter was based on the January
1997 draft of Article 2B, in which forum selection and arbitration
were both covered in 107. The Drafting Committee decided to split
the two clauses so they could be considered separately. In the
March 1997 draft (which Mr. Nader had not received at the time
he sent the letter to Mr. Gates), arbitration had been taken out
of 107 but a new stand-alone arbitration section had not yet been
inserted into the draft. We will probably see the new clause in
the May or July draft. To say that the most recent draft does
not "contain" such a clause, without explaining that
its removal was temporary, distorts the true status of UCC 2B.

The justification in your letter for the
almost complete ability of software companies to escape liability
for the consequences of defective products rings hollow. You claim
that "careful computer users routinely back-up their data"
and that "data re-entry usually is minimal." This has
not been our experience. You cite no data in support of this assertion.
Please forward to me whatever study you are relying upon. We would
be most interested to see any empirical support for the counterintuitive
claim that consumers are not damaged by software defects.

You also state in your letter that under
UCC 2B a company cannot "disclaim all warranties and deny
that a product conforms to statement [sic] made on packaging or
user manuals ." The section on express warranties,
UCC 2B 402, specifies that product descriptions, including advertising
and presumably software manuals and other documentation, may be
considered express warranties. Were the situation that simple,
we would have no disagreement.

However, UCC 2B 402 (a)(2)
goes on to require that in order to become an express warranty,
a representation must become part of the "basis of the bargain."
The states vary in defining which statements become part of the
basis of the bargain. In some states, such as Virginia, the court
will treat statements of fact that come with the product as express
warranties whether or not the customer heard or read them before
buying the product.[8] This is our interpretation of the proper way
to read the Official Comments to Section 313 of the current Article
2 of the Uniform Commercial Code, and this is the direction that
has been taken by the drafting committee for the revisions to
Article 2. It focuses on what the company agreed to sell and imposes
the fairly mild requirement that the product do what the company
says it will do.

In other states, such as New
York, a representation cannot become part of the basis of the
bargain unless the customer relied upon it in making the purchase.[9]
Therefore, a purchaser of software in New York that did not read
the manual or documentation could not hold the software company
liable on an express warranty theory if the product fails to function
in accordance with the manual and other documentation. This would
be a common situation in these states because in online and mail
order purchases, customers rarely get a chance to read the manual
or examine the package prior to purchase.

At the next Article 2B Drafting
Committee meeting, we will propose that Article 2B be revised
to eliminate the "basis of the bargain" requirement,
so all statements of fact made in the documentation and on the
package will be treated as express warranties under the law. You
state in your letter to Mr. Nader that the law already creates
a warranty that the product conforms to the statements on the
packaging and in the manuals. For this reason, I trust that you
will join us in proposing that the Committee eliminate this opportunity
for misunderstanding in the draft of 2B.

On the issue of virus liability
you claim that the "express language of the draft" requires
companies "in most all cases" to exercise reasonable
care to remove all viruses, or the draft might alternatively require
an implied warranty that the product is virus-free. Under the
draft, for any product costing $ 501 or more, or for any product
delivered online (such as over the Internet on the world wide
web, an increasingly popular point of sale), the software publisher
can avoid all liability for a virus just by including a provision
buried in the license that eliminates this responsibility. The
virus protection that does exist - for mass market customers purchasing
a physical copy of software in a traditional retail or mail order
transaction - is far from absolute. Section 2B-313(d) allows a
company to escape liability if it can show that the customer did
not "exercise reasonable care to prevent or avoid loss."
This provides a convenient loophole for companies that will attempt,
even though they infected a customer's computer with a virus,
to claim that the customer is to blame for not backing up data
more frequently, or for not using their own virus checker or for
not updating their virus checker frequently enough.

Furthermore, the implied warranty
proposal, which was rejected at the April meeting, would have
allowed the software publisher to disclaim liability for viruses
for all customers (including small-purchase-price customers),
just by including a "conspicuous" disclaimer, as you
stated. What you failed to mention is that under 2B a disclaimer
is statutorily defined as conspicuous even if it is contained
within the software package, hidden from the customer at least
until the software is installed, and it may never be seen.

In your letter you admit that even a term
that would cause a reasonable person to refuse the license is
valid under UCC 2B if an "I Agree" icon for this term
is clicked with a mouse. This is an extremely dangerous provision
that will allow software companies to impose unreasonable license
terms on powerless purchasers. UCC 2B takes advantage of the customer
in this situation because the decision to buy the product has
been made, and money has already changed hands. When the "I
Agree" icons appear during installation the customer is in
"installation mode," and is highly likely to click on
any icon necessary in order to install the software.
This is a fundamentally different decision than those traditionally
made during a purchase, when the terms of the sale (a license
under 2B) are at issue. By imposing distance and time between
the purchase decision and the supposed assent to the license,
licensors will be able to slip extremely unfair license terms
past customers who are just trying to get the product they already
paid for working.

In conclusion, I disagree with your letter's
interpretation of the law, Article 2B, and Mr. Nader's correspondence.
Nonetheless, I look forward to working together with SPA and all
the other participants in the Article 2B drafting process to protect
the customers that make your industry among the most lucrative
economic sectors in the United States and the world.

Sincerely,

Todd J. Paglia

cc: Ray NimmerCarlisle Ring

FOOTNOTES

Untitled

1. See Washington Connections
1.7, The Chronicle of SPA Government Affairs Activity, August
1996 (http://www.spa.org/gvmnt/wash1_7.htm#anchor1747375).

2. This information is summarized
in the Article 2 Draft at http://www.law.upenn.edu/library/ulc/ucc2/397art2.htm

6. The
consumer's lawyer might well win an argument about unfairness.
But as we all saw in Carnival Cruise Lines v. Shute, 499
U.S. 585, 111 S. Ct. 1522, 113 L.Ed. 2d 622 (1991), courts have
varying notions of what is "unfair" when it comes to
forum selection clauses.

9. Several states follow the rule
of the old Uniform Sales Act and interpret "basis of the
bargain" under the UCC to be a continuation of the requirement
that actual reliance must be shown for an express warranty to
be valid. SeeGregg v. U.S. Industries, Inc., 887
F.2d 1462, 1472 (11th Cir. 1989) ("Many cases
under New York warranty law support the district court's charge
that a showing of reliance is necessary to establish a breach
of warranty claim."). The law is not entirely settled in
New York but it is clear that other states also follow the approach
whereby an express warranty exists only where a buyer relies upon
the seller's claims. Phillips v. Ripley & Fletcher,
541 A.2d 946, 950 (Maine 1988) ("[T]he purchaser must show
reliance in order to make out a cause of action for breach of
warranty."); Hillcrest Country Club v. N.D. Judds Co.,
461 N.W.2d 55, 61 (Neb. 1990) ("This court has held that
"[s]ince an express warranty must have been 'made part of
the basis of the bargain,' it is essential that the plaintiffs
prove reliance upon the warranty.") (citing Wendt v. Beardmore
Suburban Chevrolet, 219 Neb. 775, 780, 366 N.W.2d 424, 428
(Neb. 1985)); Thursby v. Reynolds Metals Co., 466 So.2d
245, 250 (Fla. 1984) ("[A]n express warranty is generally
considered to arise only where the seller asserts a fact of which
the buyer is ignorant prior to the beginning of the transaction
. . . and on which the buyer justifiably relies as part of the
"basis of the bargain . . . .") (citations omitted);
Southwestern Bell Telephone Company v. FDP Corp., 811 S.W.2d
572, fn2 (Texas 1991) ("Courts and commentators are divided
on the extent to which [basis of the bargain] abrogates the common
law requirement of reliance.").